Part of their story is of course correct. Governments have gotten themselves into problems with debt, time after time. This is happening again now. In fact, the same two authors recently prepared a working paper for the International Monetary Fund called Financial and Sovereign Debt Crises: Some Lessons Learned and Some Lessons Forgotten, talking about ideas such as governments inflating their way out of debt problems and pushing problems off to insurance companies and pension funds, through regulations requiring investment in certain securities.

Many seem to believe that if we worked our way out of debt problems in the past, we can do the same thing again. The same assets may have new owners, but everything will work together in the long run. Businesses will continue operating, and people will continue to have jobs. We may have to adjust monetary policy, or perhaps regulation of financial institutions, but that is about all.

I think this is where the story goes wrong. The situation we have now is very different, and far worse, than what happened in the past. We live in a much more tightly networked economy. This time, our problems are tied to the need for cheap, high quality energy products. The comfort we get from everything eventually working out in the past is false comfort.

If we look closely at the past, we see that in some cases the outcomes are not benign. There are situations where much of the population in an area died off. This die-off did not occur directly because of debt defaults. Instead, the same issues that gave rise to debt defaults, primarily diminishing returns with respect to food and other types of production, also led to die off. We are not necessarily exempt from these same kinds of problems in the future.

Why the Current Interest in Debt Levels and Interest Rates

The reason I bring up these issues is because the problem of too much world debt is now coming to the forefront. The Bank for International Settlements, which is the central bank for central banks, issued a report a week ago in which they said world debt levels are too high, and that continuing the current low interest rate policy has too many bad effects. Something needs to be done to normalize monetary policy.

Janet Yellen, Federal Reserve Chair, and Christine Lagarde, managing director or the International Monetary Fund, have also been making statements about the issue of how to fix our current economic problems (News Report; Video). There is the additional rather bizarre point that back in January, Lagarde used numerology to suggest that a major change in policy might be announced in 2014 (on July 20?), with the hope that the past “seven miserable years” can be followed by “seven strong years.” The IMF has talked in the past about using its special drawing rights (SDRs) as a sort of international currency. In this role, the SDRs could act as the world’s reserve currency, be used for issuing bonds, and be used for setting the prices of commodities such as gold and oil. Perhaps a variation on SDRs is what Lagarde has in mind.

So with this background, let’s get back to the main point of the post. How is this debt crisis, and the likely outcome, different from previous crises?

1. We live in a globalized economy. Any slip-up of a major economy would very much affect all of the other major economies.

Banks hold bonds of governments other than their own. If a major government fails to make good on its promises, it can affect other governments as well. Smaller countries, like Greece or Cyprus, can be bailed out or their problems worked around. But if the United States, or even Japan, should run into major difficulties, it would affect the world as a whole. See my post, Twelve Reasons Why Globalization is a Huge Problem.

2. Our problem now is not simply governmental debt; it is debt of many different types, affecting individuals and businesses of all kinds, as well as governments.

In the studies of historical debt by Reinhart and Rogoff, the focus is on governmental debt. Now there is much more debt, some through banks, some through bonds, and some through less traditional sources. There are also derivatives that are in some ways like debt. In particular, if there are sharp moves in interest rates, it is possible that some issuers of derivatives will find themselves in financial difficulty.

There are also promises that are in many ways like debt, but that technically aren’t guaranteed, because legislatures can change the promised benefits whenever they choose. Examples of these are our current Social Security program and Medicare benefits. Citizens depend on these programs, even if there is no promise that they will continue to exist in their current form. With all of these kinds of debt and quasi-debt, we have a much more complex situation than in the past.

3. Our economy is a self-organized system that has properties of its own, quite apart from the properties of the individual consumers, businesses, governments, and resources that make up the system. Circumstances now are such that the world economy could fail, even though this could not happen in the past.

Years ago, when a civilization collapsed, the network of connections was not as dense as it is today. Most food was not dependent on long supply chains, and quite a bit of manufacturing was done locally. If one economy collapsed, even a fairly large one like the Weimar Republic of Germany, the rest of the world was not terribly dependent on it. Figuratively, the “hole” in the dome could mend, and over time, the economy could strengthen and go on as before. We cannot count on this situation today, however.

4. Fossil fuels (coal, oil and natural gas) available today are what enable tighter connections than in the past, and also add vulnerabilities.

Early economies relied mainly on the sun’s energy to grow food, gravity to help with irrigation, human energy and animal energy for transport and food growing, wind energy to power ships and wooden windmills, and water energy to operate water wheels. Wood was used for many purposes, including heating homes, cooking, and making charcoal to provide the heat needed to smelt metals and make glass.

In the past two hundred years we have added fossil fuels to our list of fuels. This has allowed us to make metals in quantity, as well as concrete and glass in quantity, enabling the development of much technology. The use of coal enabled the building of hydroelectric dams as well as electrical transmission lines, thus enabling widespread use of electricity. Fossil fuels enabled other modern fuels as well, including nuclear energy, and the manufacture of what we today call “renewable energy,” including today’s wind turbines and solar PV.

Of the fossil fuels, oil has been especially important. Oil is particularly good as a transport fuel, because it is easily transported and very energy dense. With the use of oil, transport by smaller vehicles such as cars, trucks and airplanes became possible, and transport by ship and by rail was improved. Such changes allowed international businesses to grow and international trade to flourish. Economies were able to grow much more rapidly than in the pre-fossil fuel era. Governments became richer and began offering education to all, paved roads, and benefits such as unemployment insurance, health care programs, and pensions for the elderly.

Thus, fossil fuels enable a very different lifestyle, and very different governments and government programs than existed prior to fossil fuels. If something were to happen to all fossil fuels, or even just oil, most businesses would have to cease operation. Governments could not collect enough taxes to continue functioning. Very few farmers would be able to produce food and transport it to market, because oil is used to transport seeds to farmers, to operate machinery, to operate irrigation equipment, to transport soil amendments, and to create herbicides and pesticides.

This situation now is very different from the past, when most food was produced using human and animal labor, and transport was often by a cart pulled by an animal. Before fossil fuels, even if governments collapsed and most people died off, the remaining people could continue growing food, gathering water, and going about their own lives. If we were to lose oil, or oil plus electricity (because oil is required to maintain electric transmission and because businesses tend to close when they are missing either oil or electricity), we would have a much harder time. Most of our jobs would disappear. Banks wouldn’t be able to operate. Our water and sewer systems would stop working. We would find it necessary to “start over,” in a very different way.

5. Because of the big role of debt today, economic growth is essential to keeping the current economic system operating.

It is much easier to pay back debt with interest when an economy is growing than when it is shrinking, because when an economy is shrinking, people are losing their jobs. Even if only, say, 10% lose their jobs, this loss of jobs creates many loan defaults. Banks are likely to find themselves in a precarious position and are likely to cut back on lending to others, making the situation worse.

If the economy starts shrinking, businesses will also have difficulty. They have fixed costs, including rent, management salaries, and their own debt repayments. These costs tend to stay the same, even if total revenue shrinks because of an economic slowdown. Because of these problems, businesses are also likely to find it increasingly difficult to pay back their own debt in a recession. They are likely to find it necessary to lay off workers, making the recession worse.

If economic growth is very low, this lack of growth can to some extent be covered up with very low interest rates. But such very low interest rates tend to be a problem as well, because they encourage asset bubbles of many sorts, such as the current run-up in stock market prices. It is not always clear which bubbles are being run up by low interest rates, either. For example, it is quite possible that the recent run-up in US oil extraction (see Figure 4, below) is being enabled by ultra-low interest rates debt (since this is a cash-flow negative business) and by investors who a desperate for an investment that might yield a slightly higher yield than current low bond yields.

Actually, the current need for growth to prevent defaults is not all that different from the situation in the past 800 years. In Reinhardt and Rogoff’s academic paper mentioned above, the authors remark, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.” Reinhardt and Rogoff didn’t seem to understand why this occurred, however.

6. The underlying reason regarding why we are headed toward debt problems is different from in the past. We now are dependent both on oil products and electricity, two very concentrated carriers of energy, instead of the more diffuse energy types used in the past. Our problem is that these energy carriers are becoming high-cost to produce. It is these high costs (a reflection of diminishing returns) that lead to economic contraction.

This time, in order to continue economic growth, we need a growing supply of very high-quality energy products, namely oil products and non-intermittent electricity, to support the economy that we have built. These products need to be low-priced, if customers are to afford them. Thus, it should not be surprising that economic growth in the past seems to have been driven by a combination of (1) falling prices of electricity as we learned to more efficiently produce it, and (2) continued low prices for oil.

According to Ayres and Warr (Figure 2), power stations in 1900 converted only 4% of the potential energy in coal to electricity, but by 2000, the conversion efficiency was raised to 35%. This improvement in efficiency allowed the continuing decrease in electricity prices. With lower prices, more individuals and businesses were able to afford electricity, and more technology using electricity became feasible. Cheap electricity allowed goods to be produced at prices that workers could afford, and the system tended to grow.

For oil, the price of oil remained relatively flat in inflation-adjusted terms for a very long time, even as engineers developed ever-more-efficient devices to use that oil.

Figure 3. Historical oil prices in 2012 dollars, based on BP Statistical Review of World Energy 2013 data. (2013 included as well, from EIA data.)

We ran into our initial problems extracting oil cheaply in the early 1970s, after US oil production started to decline (Figure 4).

Figure 4. US crude oil production split between tight oil (from shale formations), Alaska, and all other, based on EIA data. Shale is from AEO 2014 Early Release Overview.

Back in the 1970s, we were able to work around the price spike by bringing oil production online in several additional places, including the Alaska, the North Sea, and Mexico. Unfortunately, those areas are now declining as well. Thus, we are increasingly forced to extract oil from areas that are high priced either (a) because of high extraction costs (such as the tight oil now being extracted in the United States) or (b) because of high indirect costs (such as the need for desalination plants and food subsidies in the Middle East). These can only be funded if oil prices are high, allowing governments to collect high levels of taxes.

7. In historical periods, defaults were mostly associated with the transfer of ownership of various productive assets (such as land and factories) from one owner to another. Now, we are vulnerable to changes that could ultimately cut off oil and electricity, and thus bring the system down–not just transfer ownership.

The kinds of things that could bring the system down are diverse. They include:

War in the Middle East that would vastly disrupt oil exports. We do not have alternative suppliers–the world would have to do without part of its supplies. We are vulnerable now, because oil exporters are getting “squeezed” by prices that have not risen substantially since 2011. This makes it harder for Middle Eastern countries to fund their budgets, making wars and civil disorder more likely.

A spike in oil prices, perhaps caused by a war in the Middle East, that would vastly disrupt oil exports. Oil importing countries would head back into recession, with many layoffs. Governments are in worse shape for fighting this situation than they were in 2007-2008.

An increase in interest rates. While Quantitative Easing and Zero Interest rate policy may not look like they are doing much, an increase in interest rates would not work well at all. With higher interest rates, governments would owe more in interest payments, so would need to raise taxes (leading to recessionary effects). The monthly payments required for buying high-priced goods (from cars, to houses, to factories) would rise, cutting back on demand, also tending to lead to recession.

A decrease in lending, or even a failure of debt to keep rising, would also be a problem. Janet Yellen’s recent IMF speech highlighted the possibility of using regulation to prevent excessive debt. Unfortunately, increasing debt is very much needed to keep oil prices high enough to enable extraction at today’s high cost levels. See my post The Connection Between Oil Prices, Debt Levels, and Interest Rates. If debt levels drop, we run the danger of oil prices dropping as dramatically as they did in late 2008, when lending froze up.

Figure 5. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

8. The world is now filled with a large number of people in powerful positions who mistakenly think they know answers to questions, when they really do not. The problem is that researchers tend operate in subject-matter “silos.” They build models based on their narrow understanding of a problem. These models may temporarily work, but as we reach limits in a finite world, these models produce misleading results. The users of these models do not understand the problem and make decisions based on badly flawed models.

Economists do not understand energy issues. They seem to think that their models, which ignore energy issues, are fine. All they need to do is fine-tune regulation, or tweak interest rates, and everything will be fine. Unfortunately, these economic models no longer work, as I explained in a recent post, Why Standard Economic Models Don’t Work–Our Economy is a Network.

In fact, the issue is more basic than just bad models that economists are using. The whole “peer-reviewed paper” system, with its pressure to write more peer-reviewed papers, each resting on prior peer-reviewed papers, is flawed. Models are built and used endlessly, in part because that is the way things have been done in the past. Once an approach is used frequently, everyone assumes it is correct. Models can and do have short term-predictive power, but that fact does not mean that the approach works for the long term.

The problem we are running into is the fact the world is finite. Growth can’t continue indefinitely. The way that the physical world enforces the end to growth is not obvious, until we start hitting the limits. The limits are cost of production limits for oil and for our supply of stable grid electricity. (I have talked about selling prices, but selling prices are not really the limits, in themselves. It is the fact that with higher costs of production, either selling prices must go up, or profits and the ability to invest in new production must go down–that is the problem. Right now, the rising cost of production of oil is being hidden in prices that are too low for oil producers. So many assume we don’t have a problem. The issue of adequate government funding is also mixed into the price/cost of production issue.)

Models that are no longer correct fill every area of study, from actuarial models, to financial planning models, to economic models, to models forecasting future oil and gas production, to climate change models.

Some models are deceptively simple–the idea that the number of years of future production of oil (or gas or coal) can be estimated by [Amount of Resources / Current Annual Production] is a simple model. Unfortunately, this model doesn’t work, because we can never get enough investment capital to extract all of the fossil fuel that seems to be available–the price can never go high enough, and stay high enough. High prices simply bring on recession. See my post, IEA Investment Report – What is Right; What is Wrong.

In fact, it is pretty hard to find any model that continues to work, as we reach limits in a finite world. This is not intuitively obvious. If a model worked before, why wouldn’t it work now? Researchers and well-meaning leaders follow models that sort of worked in the past, but don’t really model the current situation. Thus, we have well-meaning leaders, doing their best to make things better, inadvertently making things worse. In a finite world, everything is “connected” to everything else, so things that look beneficial from one perspective can have a bad outcome viewed another way. For example, a reduction in carbon dioxide emissions from closing coal plants risks major electrical outages is New England and seems likely to raise electricity prices. Such changes push the economy toward recession, and perhaps ultimately toward collapse.

Governments are one area squeezed by higher oil and electricity costs. As governments cut back, whether these cut backs are in education, unemployment benefits, military spending, or healthcare spending, there are indirect effects on the economy as a whole. The problem is that government spending creates jobs. As government spending is cut, it pushes the economy toward contraction–even if part of today’s spending is clearly wasteful. It creates a conundrum–fixing one problem makes another problem worse.

Conclusion

We live in perilous times. We have leaders who think they know the answers but, in fact, they do not. The debt problems we face now are not just overspending problems; they are signs that we are reaching limits of a finite world. World leaders do not seem to understand this connection. It is not even clear that they understand the connection of debt problems to the need for cheap-to-produce, high-quality energy products.

World leaders are nevertheless convinced that they know the answers, based on complex, but very flawed, models. Unfortunately, actions taken based on these models have a good chance of making the situation worse rather than better. For example, trying to tie a world economy closer together, when it is already heading toward collapse, seems like a recipe for disaster.

I find Christine Lagarde’s use of numerology in her January 14, 2014 speech at the National Press Club Luncheon disturbing. Is she trying to signal some “in crowd” to make different decisions, in advance of a big IMF announcement? Or is numerology being used for prediction? Such an approach to forecasting would seem to be even worse than using models based on silos of limited understanding.

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About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.

880 Responses to Debt: Eight Reasons This Time is Different

Dear Gail
I have been reading your excellent blog for a long time now and never commented.
I consider myself well educated and relatively intelligent but I always struggled with economics.
You speak common sense and it “rings true”. Sure beats numerology.

I am particularly encouraged by your more recent statements re. the economy as a network.
The impact of our inter-connectedness and the fact that it’s now obvious that we humans live in multiple, inter-connected systems comprising self organising agents whose individual actions affect the whole in unforeseeable ways has, sadly not been absorbed by so many of our senior decision makers. As you rightly point out, our education system reinforces this isolationist thinking and produces the fruitless repetitive actions that didn’t (but should have) worked the last time we tried.

I work as a strategist for a huge but rarely recognised sector called tourism that is sleep walking into the future and showing all the signs of an economy nearing the abyss. Paper thin operating margins are getting even skinner; prices are being forced down further by new competitors (destinations) that have more to gain than lose from selling short; customers have been convinced that cheap travel is now a right and not a privilege at the same moment when core input costs (energy, land, water, food) are bound to rise.

Every time I doubt myself for daring to suggest there has to be a better way, your blog encourages me to stick at it. Thank you.
Anna Pollock http://www.conscious.travel

You are welcome. I am not really a student of economics. I more come at this as someone who worked in the financial industry for a long time, and could see how thing worked together. When I first discovered that the economists (plus actuaries and financial planners) expected growth to continue at the same rate forever, I could not believe it. Of course, if you are only forecasting a couple of years in the future, it doesn’t seem so bad. What else are you going to assume.

It is only in recent years I have gotten involved with academic paper, both writing and reviewing them. I can see how the whole process is set up to go wrong.

One of the many strengths of this article is the way that you have taken some fairly complicated economics — and distilled them down to simple explanations that I think most people will understand. Well done!

After studying economics for 25 years now I can say, without a shade of the doubt, that economists remind me sect members. Number of assumptions, axioms mostly, not working in a real world is overwhelming. Economics stopped being really developed as an intelectual/scientific field from XX century on. Specialization and general lack of connection with other sciences killed it. Did anyone hear about any conference where economists meet people from other science areas? Economics-geology seminar anyone? Or economics-energy experts panel? Or economics-ecology conference? Pure sectarian approach. These gius just say that ‘the scientists’ will figure it out.

Thanks for your view of the situation. Casualty Actuaries don’t even go through the university system. We have our own set of curriculum and our own set of exams. The program has historically been work/self-study. Companies provide some release time for on the job study. Exams are unbelievably difficult–typically about a 35% pass rate, among people who have been studying. It often takes exam takers 10 years to get through about 10 exams.

Most casualty actuarial papers and talks are not peer reviewed, except by other people within the company of the person producing the report. Within the company, there frequently are both a “technical reviewer” and a “peer reviewer,” but no one cares about reliance on what someone did years ago–mostly, is what you are saying reasonable, given the evidence at hand.

Meetings feature quite a few longish talks and panels. There are a few university types off in a corner, with their peer reviewed papers, but they are not the focus of meetings. People who go into casualty actuarial work come from a variety of backgrounds. There seem to be a lot of graduates of state colleges. Some have been out working in another field, perhaps with a Phd in something that uses mathematics. I had a Masters Degree in math, plus another year of course work. I know one casualty actuary who had only a high school diploma, and took night school courses to fill in the college subjects he needed.

The focus is on life long learning, but peer-reviewed papers aren’t necessarily high on the list of where the learning comes from.

Gail,
I hope I did not hurt anyone’s feeling by my conclusions. There are many bright, intelligent economists I know myself. The only problem I see is that the matter they are dealing with is abstract mathematical matrix and we live in a real world.
As Steve Keen (economist by profession, university professor) stated in one of his books: when someone is saying the Earth is flat it must be an economist.

First, you were possibly too much kind talking of economists. While it’s good not to attack people or a profession, it is also good to highlight the interests involved. It is not economists (or politicians) just don’t understand our situation (remember Jancovici’s presentation at France’s parliament), it’s they have an interest in not doing any change. This is particularly true about economists, because they job is to create growth and in case growth becomes impossible (as it is now) they just go out of bussiness. To aknowledge the end of growth is to destroy their job, and this is a main reason to not to do it. It is not just they don’t understand, they don’t want to, they can’t. And highlighting this is important because the general public has economists in high esteem -because they are by definition growth drivers and most people think growth is good- and will not easily be willing to believe economists are misleaded. That’s why the point in showing economists are not just dumb but rather interested players.

The other point is about what Kesar is talking about. Economics has never been a true science, and the fact it uses a lot of maths doesn’t make it one (dont’ be surprised Lagarde is going through numerology, numerology don’t makes less sense that her job in the IMF). Graeber showed economy is essentially flawed by completely false assumptions, as the one regarding barter as a prehistoric universal. There is also an argentinean economist called Walter Graziano who was striken by the biais regarding game theory, wich individualism was not mathematically demonstrated at all (I don’t exactly recall what it was, but John Nash was a part of the explanation). This happened in the 90’s, the very neoliberal decade, and so he started researching on Chicago university history and discovered it was founded and controlled by the Rockefeller family. So he ended up writing a couple of historical books on TPTB and the coming peak oil (he writed in the early 2000). The point of course is all economic discipline is built on false foundations that serve actual interests very well.

The fact that economists work for politicians pretty well makes certain that economists will provide guidance that makes it look like politicians (and their central banks) are powerful, and everything will be fine forever after. The economists that get hired and promoted have things to say that politicians like to hear.

There is also the problem that changing methodology, no matter how bad the previous methodology was, creates problems. It is “better” in some sense to supposedly leave the methodology the same, and (for example) just leave some things out of the CPI increase that increased by embarrassingly high amounts.

The French often make interesting use of language. Since the term was used in economic before medicine I can forgive them. But the description as fantasy over reality is a bad description of the medical autism. I would say narrow analysis and excessive attention to a narrow view. Which of course can be a positive in some areas like mathematics and physics.

I understand that the group now calls itself “real-world economics” – or at least that is what the journal changes its name to. I understand Herman Daly is (or was) was involved. It may still be too close to regular economics /ivory towers for me.

In my opinion Georgescu-Roegen or Daly are far from the standard economic point of view Their pre-analytic view of economy as a subset of social and ecological spheres are the right approach to the issue. For example, Georgescu-Roegen’s critique to the Solow-Stiglitz production function went to the point and remain unanswered. In words of Georgescu-Roegen

One must have a very erroneous view of the economic process as a whole not to see that there are not material factors other than natural resources. To maintain further “the world can, in effect, get along without natural resources” is to ignore the difference between the actual world and Garden of Eden. (Georgescu-Roegen, 1975)

This is the kernel of the economic paradigm who thinks of the actual world as if were the Garden of Eden. The Solow’s answers to the Daly’s questions are an outstanding piece which shows the tenets of the neoclassical economics to the naked eye.

Thanks for the link. It is hard to believe that the economists made conscious decision to leave out resources from their production function, but I suppose that once they had it one way, changing to another way would make it clear that the new way was wrong.

Gail, you’re probably better off NOT being a “student of eCONomics”. I was trained formerly 30 years ago (along with computer science, statistical modeling, database architecture, etc.), and I had to forget most of what I learned in order to understand how “the economy” actually functions (or what I “think” I know).

Speaking of which, the consumption of oil to GDP along with the acceleration in the price of oil yoy, YTD, and q-q annualized is probably taking a 1-1.2% bite out of real GDP growth that is trending well below 1% per capita.

When real GDP per capita is growing at 2-2.5% with oil at $20-$30 and oil consumption to GDP of 1-2%, there exists a margin for the economy to withstand an increase in the price of oil from a lower price.

However, when the economy is growing at or below 1% real per capita, the economy is operating at the recessionary level of oil consumption to GDP along with the persistent high price of oil and its acceleration, there is the ongoing risk of an “exogenous shock” (love that euphemism) to the weak economy, resulting in stall speed and consecutive or periodic q-q annualized contractions for real GDP per capita. I strongly suspect that the US economy decelerated to stall speed in Q3-Q4 2013 and is likely in contraction, notwithstanding the weather effects in Q1. A remarkably similar cyclical deceleration of real GDP per capita occurred in late 2007 and early 2008 and in late 2000 and early 2001.

If you recall at the time, however, the Fed had been raising rates and the yield curve had inverted, yet most eCONomists, Wall Streeters, and financial media influentials did not see a recession (that had already begun), were not expecting a bear market, and a “soft landing” was the worst case if a slowdown were at hand. But note that during debt-deflationary regimes, recessions and bear markets are not preceded by rising short-term rates and an inverted yield curve. That is, recessions are not caused by tightening central bank reserves and bank lending; rather, recessions occur as a result of insufficient business and household income to sustain demand for investment and household spending.

IOW, the economy’s “speed limit” is much slower and cyclical demand constraints appear well below the levels of the past, catching businesspersons, economists, bankers, and gov’t officials by surprise when the economy “unexpectedly” decelerates and contracts from the much slower secular trend rate of growth.

I strongly suspect that we are at a similar juncture as of Q4 2013 to date, and I won’t be surprised to see real incomes, profits, and thus investment and production much weaker for the rest of the year into 2015, as the oil-related shock slows the economy more than most expect.

In a further sign of weakness in China’s troubled real-estate market, land sales in 300 cities fell by nearly a third in the second quarter from the year-earlier period, as property developers grapple with declining home purchases and prices.

Developers are wary of buying more land and starting new projects, given that many cities face an oversupply of apartments and potential home buyers are sitting on the sidelines.

If China is not doing as well, that would seem to have a spill-over effect on the rest of the world. It seems like we don’t have many star players any more. Perhaps going to war in the Middle East pumps up economies, but that is hardly a long-term growth strategy.

Part of the US problem is that government spending is no longer an engine of growth. Even things like cutback in unemployment benefits are having an effect on the economy. Low-income people without government benefits are in really bad shape, from the point of view of spending.

Yes, indeed, Gail. From 2008-10 to date, China’s incremental “reported” real GDP per capita growth contributed 50-75% of growth of world real GDP per capita (a growth rate of just ~0.5%/year), and this required China creating the largest credit and fixed investment bubble as a share of GDP in world history, far surpassing that of Japan in the 1980s and the US in the 2000s.

US gov’t spending has not grown since 2010, which has reduced GDP growth by as much as ~1.5%/year. But spending has not grown because total local, state, and federal debt to GDP of 103%, reaching the so-called “jubilee” threshold at which point the differential rates of growth of debt to GDP achieve a cumulative order of exponential magnitude, which precludes debt from growing faster than GDP thereafter.

During the next recession, gov’t spending will not be “stimulative” in a Keynesian context; rather, any incremental deficit spending (assuming no additional imperial wars for oil) will go to low-multiplier income support for the newly unemployed, elder Boomers for shortfalls in SS and Medicare/Medicaid/Obummercares, food stamps, and the like.

Neither will supply-side policies work to stimulate demand because the US economy is similarly at the “jubilee” threshold for private debt, especially non-financial corporate debt (to buy back shares to reduce share float to pad earnings/share and goose stock prices) since 2010.

Growth of trade peaked with the business cycle in 2012-13 and is down yoy, i.e., recession.

So, we are faced with fiscal constraint from high public debt and debt service to GDP; high private debt to wages and GDP; energy consumption to GDP at a recessionary level; peak Boomer demographic drag effects on housing and consumer spending exacerbating fiscal constraints; Obummercares costs squeezing the after-tax real incomes of the previously uninsured; and now China poised to cease being the so-called “engine of growth” for the world economy and trade.

The sad lesson of history is that each time we human apes have faced similar coalescing conditions, the elites sent us peasants to fight one another “over there”, into the breach and trenches, on the high seas, in the deserts, in the jungles, at the Black Gate, and upon the Pelennor Fields of this Good Earth, all in the name of God, King/Queen, empire, and corporate persons.

Thanks for summarizing the problems at this time. I wasn’t aware of the World Trade Slowing Down. This pretty much confirms the problem. I was amazed at the building in China when I visited there in 2011. Also, the huge amount of debt that underlies all of the building that is going on there.

You are right that at some point, we reach the maximum carrying capacity for debt. If interest rates go up at all, that maximum carrying capacity will go down–big Oops!

The indications are then that we are already in recession, even if the result isn’t showing up in government data.

You are spot on with this — we are at best stall speed with oil over 100 bucks.

What amazes me is when I put the following IMF research in front of various people including friends in the finance industry and say ‘so what impact would a sustained price of over $100 do to growth’ — they essentially go catatonic….

Well one actually said — we adapt — we use less….

And I said — thank you for proving my point — we consume less – we drive less – we fly less >>> and as we know from Grade 9 economics class — less leads to a recession then a depression and eventually a deflationary spiral into hell. And QE ZIRP etc are the policies that have been put forward to counter that spiral.

Something about forest and trees applies here — they have the facts — they know the answers — but they cannot connect the dots….

I suppose their brains don’t want to connect the dots — they don’t want to go there — because going there would be very upsetting.

According to the results of a quantitative exercise carried out by the IEA in collaboration with the OECD Economics Department and with the assistance of the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

A person wonders when voters will stop approving all of the upgraded sports stadiums for local teams, as well. The Atlanta Braves want a new big suburban stadium. At least they will use it multiple times, though.

Gail, – to suggest that Christine Lagarde is using numerology is doubly misleading: because for one, she is not – she is merely using symmetry to help the process of press releasing along. And secondly, you don’t actually believe she is using numerology, but you are throwing doubts on her anyway, simply out of professional jealousy, in my opinion. Bad move. Lagarde is really good – she understands the wider issues and is not blinkered like your average economist. She probably even reads your stuff. I bet you hope she does!

I don’t expect you to print this message, as you deleted my previous message or two from the comments section of your last blog; you hoped I wouldn’t notice they had been ‘disappeared’ after a respectable period had elapsed. But of course I noticed. I also noticed that you are saying nothing new in this latest post – it is all replay of previously expressed thoughts and conclusions – but they are all good, everything you say is right on the money.
Best wishes,
Coilin MacLochlainn

I am not sure what you are talking about. My memory is not good enough to remember if I deleted something of yours–it isn’t very common that I would.

I also don’t have any idea what you mean by, “. . . she is merely using symmetry to help the process of press releasing along.” What do you mean by that? If I were to use that device, do you think it would help my articles? It just strikes me as bizarre. But then, Ronald Reagan’s wife Nancy had an astrologer in the White House, whom they consulted on the most propitious time for signing bills, among other things.

By symmetry, I believe that Colin means that the communications manager/speech writer is using a theme oft repeated.
As for CL using numerology, she may be but there is no clear indication she is and, for me, it is a distraction from the rest of the post. Too much conspiracy without clear evidence. Our brains are wired to see patterns.

I hear that Lagarde does most of her deep thinking — while lying on a sun bed…. I wonder if she and DSK get together as he seems a rather tanned deep thinker as well…

Not sure on the numerology stuff and using that to communicate to the elites .. surely there are more secure and effective methods to pass along messages…

That said she did us the number 7 quite a few times… perhaps since she is referencing prosperous years to follow the bad years — she was giving away the upcoming wining number to the Elo Gordo draw….

The biggest problem I have with all this numerology stuff is those commentators that are referenced also claim that the PTB are involved in devil worship and all sorts of other shall we say — crazy things. They kinda totally lose me when they start ranting on like that….

I would not over rate the”numerology” reference in her little speech. To me this sounded like the attempt of humor to a dry topic. Like a man teacher would maybe pull humor out of their pocket. Also there is a cultural difference. In the US people are highly sensitive to anything touching belief Systems, from Religion to conspiracy and other areas. Europeans really don’t care, for a European her numerology references sound entertaining at most.
That being said – in her role she should know better though.

My impression of the video is that she is very intelligent and totally knows that we are in big trouble, but she sees this from a financial angle only and potential fixes in her mind are of financial nature. I’m not sure she has the clarity of your view Gail.

So cross referencing Lagarde’s comment about 7/20 and astrology. There is actually a major astrological configuration on the 20th and 21st of this month. I don’t know much about this and google is my good friend. The best description I can get is sudden change or conflict between established interests and new, young or revolutionary interests. I think I couldn’t stop laughing as the timing is too funny.

Guys, it is sad to hear that another Malaysian Airlines crashed in Ukraine. Just read it online. No details as yet. Coincidence with Lagarde “7”? MH-17, Boeing 777 on July (7th month) date 17? I know this is totally speculative but false flag?

The Lagarde address is really rather odd, I would say that our host Gail has a good point here , but what is one to make of it…? It is so odd that it simply can’t be dismissed.

‘2014: think about it – take away the zero and you get 2 and 14, 2 x 7 equals 14′. With a curious inclination of her head and pause, as if she had made a very significant statement.

And all the rest: I should have loved to have seen the faces of the audience as they were taking in this really very unusual way to start a serious speech. Actually, one could feel they were probably thinking ‘What is this? Has she lost it?’ She seems awkward, knowing it will strike people as odd, but determined to say it, and then move on.

Of course, she began with the customary self-deprecatory gambit ‘I do as I am told’ etc, (the way I once saw the British Foreign Secretary quite deliberately fumble with his microphone at the start so as to look like a fool) and then the peculiar numbers game.

It is the strangest intro I have ever heard from a professional person, let alone someone in her position, and at one point in my life I heard a lot of political figures, diplomats and high functionaries give talks to serious audiences. Even academics who were trying to entertain (ineptly) didn’t come out with stuff like this.

I have often wondered how Ben Bernanke got in front of the cameras and maintained his poker face knowing that every word out of his mouth was a lie — he most definitely knew the nature of the battle he was fighting — and that many despised him for what he was doing because they did not understand why he was doing it – and he of course could never tell them (although he hinted it at it in his farewell comments)

The pressure of knowing that civilization is at stake must have been a tremendous psychological strain. He looked like a robot at most press conferences — perhaps he dropped a couple of Xanax before taking to the podium?

Lagarde is in a similar position — perhaps she’s gone around the bend… that was without a doubt a squirrelly performance…

Has anyone found any follow up on that? Has she been asked about her bizarre comments and attempted to offer a further explanation?

Anna, – you are absolutely right. Tourism is always portrayed as a major boost to the economy of this, that or the other country. But the reality is that tourism is heading down the tubes and will be completely wiped out by the oil shock that Gail and others are predicting. People working in this industry, and that’s a whole helluva lot of people, should be looking to develop a second career for themselves on the side because, one fine day, they will wake up and the airlines will no longer be running.

Anna I can completely relate! I too live in an area that has all their eggs in the tourism basket & like Gail suggests, the ‘decision makers’ are still of the mindset that we can return to BAU, without considering any alternative outcomes.

So Gail, thank you also for getting the word out in simple terms so those of us that have no business or economic degrees can understand your very informative articles.

Gail, interestingly but not surprisingly, the Army Corps, Interior, and BLM knew well about the limits to human carrying capacity of “Lost Wages”, Phoenix, Tucson, and the Palm Desert as long ago as the 1950s-60s, but the vested interests (builders, lenders, NAR, hoteliers/resorts, and their friendly politicos) squelched and shelved the studies and reports for obvious reasons.

Now the region is facing what could be a multi-century mega-drought similar to the one that contributed to the collapse of the Anasazi and Mayan civilizations.

A common demand for solutions to our looming problem is ‘another Manhattan project, or an Apollo project, or even a repeat of WW2 initiative
All this from ‘economists’
Makes you want to weep
All the above ‘projects’ succeeded through the consumption of vast amounts of cheap energy
What we face now is first and foremost an absence of cheap energy, yet so few in any high office grasp that
‘Spend our way out of trouble! Keynesian enonomics!—again, missing the glaring truth that Keynes’ life exactly matched the era of cheap oil. His ‘economic theories’ functioned only because oil fuelled an annual growth of 7%”’thus doubling every 10 years.
My Labrador could forecast economic growth on that basis.

Wait a minute!
This post came out 0n 7/7, 2014 (2/14=7+7)!
I really think somebody, maybe a druid or something, is controlling things and giving we the illuminated occult messages that the kali yuga is begining….

I didn’t really think about that. I am not “into” numerology. July 7 should be a lucky day, I suppose. I was just thinking that it wouldn’t make sense to put up a post right before a three day weekend. Afterward would be better.

I fixed it. I think WordPress’s new self-correcting feature adds errors that are harder to find. If you mistype something, they make a word out of it, substituting nearby letters on the keyboard or reversing letters.

There is a vast interconnectedness in our world but what is the resilience of the system to stress.

I know this post may be contentious to some but I feel it is worth saying. Sometimes in the posts and comments the system is portrayed as self organising, i.e., it has some meta-self awareness which I tend to agree with. However, sometimes it is described in domino terms, once one falls the whole network fails. 2007 and 2008 showed our current financial system had the qualities to respond to change. The financial system may well have been taken to the brink but it didn’t collapse.

I prefer to relate the system to something that is living that will adapt to pain to survive but not necessarily thrive, e.g., trigger points, here is a link http://en.wikipedia.org/wiki/Trigger_point#Qualities_of_trigger_points
And for me this is a key point. How long can an unsustainable system go on for months, years, decades? In EROI terms, I believe low EROI values will lead to survival mechanisms coming into play especially in the West, and places like China might thrive for some time longer.

I use to work in the NHS, the health care system in the UK, for a long time. It was and is frequently talked about in terms that it will collapse catastrophically. Yet it keeps on going. The complexity of the organisation is beyond one person to comprehend and it’s been that way for a long time. Currently, there are warnings yet again it will collapse if we don’t pour more money into it. Nevertheless, the results I have seen over the years it keeps on going. Ever higher cost treatments draining money from low cost treatments that are ‘generally’ affordable to the masses.

World leaders do not have to act as an intelligent brain they need to adapt to feedback. This world system may go on for a lot longer than people expect where paradox reigns. The rich get richer, the poor get stupefied with infotainment and misinformation from the MSM.

The question for me is how do I respond to a world that has turned most of society to consumeristic zombies?

My view of 2008 was that the system DID momentarily collapse and was saved by pumping trillions of dollars of computer digits into the system. While the US Fed dropped $6-7T within a few years the Chinese dropped a little over 25T into their financial system as well.

When the financial, banking and insurance sectors were on the brink of collapse which would have triggered a global meltdown that to me is a collapse. Even Hank Paulson said if the Fed and US Govt had not stepped in it would have caused a financial meltdown around the world and there would have been martial law in the US.

Good point. That is part of the reason that I think collapse could in fact happen. We got very close before, and TPTB found a way to work around our problems. Now people a little farther from the scene want to come in and “fix” the system back to closer to normalcy.

Have a look at this excellent research on what happens when a complex system fails…

The key part (they examine the specifics using an example) is from p. 56 onwards (although the entire paper is brilliant)

Once a key ‘hub’ goes — everything unravels quickly – I tend to agree with that.

In 2008 if central banks don’t step in within days the power goes off and the shops would have been emptied — and getting things going again would have been like getting toothpaste back into the tube…

Central banks stepped in aggressively back stopping every bank’s loan book on the planet — I doubt that can happen again — that is why they are throwing every possible thing at the never-ending crisis —- including buying $29 trillion dollars of equities…. that indicates to me absolute and total desperation… all of what you are seeing I believe is their ‘last stand’ — they will melt down their gun barrels trying to delay the next crash

“I use to work in the NHS, the health care system in the UK, for a long time. It was and is frequently talked about in terms that it will collapse catastrophically. Yet it keeps on going.”

I’m glad you posted this because this is exactly to topic I wanted to address during this most recent posting. I have been struck since 08 at how resilient the world economic system has shown itself. Even though there were billions of dollars in defaults, the system shook it off and kept going. In fact, most property with defaulted loans were repurchased by other buyers. I for one having been on peak oil websites now since 05 know all the particulars of finite resources, limits to extraction, diminishing returns etc., expecting at any time for all hell to break loose and have admittedly written many posts suggesting collapse was certain and possibly imminent. But that hasn’t happened and I am now beginning to question why things just keep going.

I think all these things Gail are explaining are real, but what I think is also true is the resiliency of the world economy. Even if that resiliency relies on more people suffering, the system as a whole adjusts and moves forward rather than imploding. Maybe it’s like a shape shifting form from a sci-fi movie in which no matter what is thrown at it, it adjusts in some manner avoiding destruction.

I’m not saying collapse is not possible, but I am starting to reconsider the situation because it just doesn’t happen. Like the Golden Gate Bridge that has surging tides at its base flooding and ebbing, with very high winds along with millions of tons of traffic, it sways, moves, creaks, but does not fall. I’m reminded of what Colonel Troutman says of Rambo after learning he has survived that collapsed cave in ‘First Blood’, “The kid is resilient.”

It’s time for the Bertrand Russell’s Inductivist Turkey to be introduced (maybe someone already did before, nevermind):

“A turkey, in an american nurture, decide to shape its vision of the world scientifically well founded.
The turkey found that, on his first morning at the turkey farm, he was fed at 9 a.m. Being a good inductivist turkey he did not jump to conclusions. He waited until he collected a large number of observations that he was fed at 9 a.m. and made these observations under a wide range of circumstances, on Wednesdays, on Thursdays, on cold days, on warm days. Each day he added another observation statement to his list. Finally he was satisfied that he had collected a number of observation statements to inductively infer that “I am always fed at 9 a.m.”.
However on the morning of Christmas eve he was not fed but instead had his throat cut.

It doesn’t matter how many cases we list during our inductivist reasoning, nothing guarantees that the next case will lay in this inference we deducted from our observations, as the possible experiments and observations are infinite by number and type.
The only valid scientific method is to test the theory using the assertions which can be deducted.”

But is resilience perhaps less after the last 7 years of QE etc? In WW1, units could take 80% casualties and still cohere and fight; by WW2, that was down to about 20% and then they had to be withdrawn form the front-line: same people, same backgrounds and situations but less resilient.

I have taken a 60% drop in turn-over in the last two years, but I’m still solvent and comfortable. How? No debt. Very high profit margin.

Contrast our global economy: high debt, low profits. But we probably have a lot of creative accounting still to go, after all, the situation is desperate. Torture sessions always go on far longer than one could have anticipated.

The fact that we are now at a point where the central banks are back stopping absolutely everything with enormous amounts of money — they have now determined they will not allow any key entity to fail — means that we entered a dangerous new phase post 2008 – the system is extremely brittle now — they know that and they are throwing every possible thing at this.

Obviously this has to bust up at some point — the fact that central banks are hitting this with both barrels suggests to me that the next crash will be the big one – they know it — and they do anything to fend it off.

The Guardian article posted yesterday indicates that the Pentagon sees calamity in 2015… of course nobody knows for sure — but that seems quite likely.

There is no growth — US actual GDP is closer to -6% — China is outright lying — it feels like the stimulus programs are starting to push on a string….

If that is correct then I cannot see how this goes past 2015. They can and no doubt will try to push harder — but we all know what happens when you put your full weight onto a string….

Stein’s Law: ” Things that can’t go on forever eventually stop”
Two lemmas ( mine — Interguru’s Lemmas )
1) They go on a lot longer than you think they can.
2) They stop suddenly without warning. Even those who see it coming have no idea when.

Stilgar, about a year ago I posted something similar to what you have just stated. I also said that we are underestimating how resilient the system is. I was called a “troll.” However, I still stand by that position. When faced with its own extinction the system, just like any animal, will fight to stay alive. It will adapt, evolve, try and create a new ecosystem for itself to live. Granted, eventually, the system will probably fail, but with the entire world poised to die-off you can bet that every stop will be pulled to keep it going. That is why collapse has always been 2 years off, 5 years off, just around the corner….and yet the moment never arrives. The empire, even in its death throes, is still very strong.

You are right, in that we don’t really know the resilience of the system to stress, until we push the system too far, and it collapses.

If the myth were true that oil prices will keep going up and up, it seems like there would be a better chance of the system hanging together. Producers would keep producing ever higher-cost oil. We would still have problems with “minimum operating levels” for things like pipelines and refineries, but perhaps those could be worked around with even higher cost oil, so that some oil could be refined that would never be sold, just to keep the system full enough to work.

Clearly, the economy has gone on in a debilitated way for quite a while. Perhaps it can continue for a while longer. It seems like when someone tries to “fix” the system is when it is most vulnerable.

What happens as limits are approached – hard limits – in a system with lots of feedback designed to keep it on track?

It stays on track. Until those limits are reached, at which point it behaves far far worse than a system without any feedback.

Imagine a car on a race track, being driven faster and faster. With a poor driver at some point it wobbles or spins off track. With a really really good driver it keeps going faster and faster, until when the inevitable limit is reached you have a really bad very high speed crash.

Sometimes the ‘okay so far’ mentality and ignoring the tyre squeals isn’t optimal.

I too like to visualise the global economy as a living entity. Nicole Foss has compared the way in which it pulls resources away from the extremities (to ensure the survival of the core) to a body undergoing hypothermia. And I think David Korowicz has suggested that a major bank failure or chaotic sovereign default is analogous to a heart attack or stroke… which is the key point, I suppose. The system has resilience to stress right up until it loses a critical input or receives a fatal insult, as so nearly happened in 2008. And I would argue that the low EROEI survival mechanisms to which you refer are already in play, these being QE, mega-debt, low interest rates, and the tight oil/gas boom that those enabled.

Oil, which we can perhaps liken to blood, is a critical input, so the economy’s imminent failure to maintain an adequate rate of extraction is a serious concern. To continue the metaphor, I see an obese individual on the life-support of unconventional monetary policy, receiving infusions of poor quality, fracked ‘blood’, and waiting for the final coup de grace. We cannot say where this will come from but a repreive of decades seems unlikely, given a variety of factors such as ever-rising capex costs for the oil majors and the marginal utility of debt in the US and Japan.

“The problem we are running into is the fact the world is finite. Growth can’t continue indefinitely. The way that the physical world enforces the end to growth is not obvious, until we start hitting the limits. ”

i find it sad that so many humans are so divorced from the obvious foundational basis for our existence.

Maybe you haven’t tried to reason with communists as I have. They insist that growth has in the past come from new ideas, inventions, improved efficiency, new tech. And will do so forever more in the future. And Malthus was proved wrong by events. It’s not easy to counter those notions.

Actually, overproduction, and decreasing returns on capital, hence the wild roller coaster ride of ups and downs of capitalism.
That, and alienation of labor.
But agree, Ideological Marxists are not the most scientifically literate of our species.

I must disagree. We are not talking about one more gadget which will be unavailable for teens. We are talking shortages in most basic goods – food, water, electricity, utility and health services (no oil -> no food for billions of people). When people are hungry they go out to the streets. The rest we all know from history.

I bet everyone here from time to time is hit by cognitive dissonance. I must admit I am. I go out and see – kids are still playing in the parks, cars are driving the streets, shops are full of goods, people drink coffee and smile. And I wonder – will this go like this for much longer? How can all of this collapse and almost nobody is aware. So in this moment I have the same feeling as you Stilgar – we will probably adapt this or other way. But deep down I know we won’t. This is where heart clashes with mind. I also would like to believe, but I just can’t.

I suspect the outcome will be far worse than I can envision — and I have been to a few places where I have seen how bad things can truly get (post quake Haiti comes to mind – Jakarta post 98 collapse)

I think it is important to keep in mind that aid agencies will not be there to help us when the food and medicine stop….

Although from time to time I get a shiver when I think of the great unraveling — for the most part I am curious observer — almost like a Martian looking down at these beings who race around consuming, oblivious to the tidal wave of despair and suffering that is about to crush them…

Agree — it seems unimaginable that all this modernism could unravel as has been suggested. I find myself almost comforted when I venture out of my valley on a trip to the city where everything is operating normally — thousands of cars trapped in traffic honking and beeping — the lights are brightly shining — the malls are full as are the restaurants…. how could this possibly end?

One can almost be lulled into a false sense of security.

I do not believe there can be slow transition – because slow = less ….. as in people consume less — travel less — drive less — because a) things are more expensive b) median incomes are falling c) massive numbers of people have no income at all

If this is a transition then what are we transitioning to? Ground Zero? Because that is the only logical outcome of a transition – there is no half way. There is no soft landing because there are only jagged rocks below.

We will end up at whatever ground zero will be — but I think it will be Hemmingway’s bankruptcy – slow at first then very quick indeed.

All of these things are deflationary pressures — which have been held off by stimulus —
sort of like sticking fingers in holes that have broken through in the Three Gorges Dam — as more holes pop through the concrete more fingers get stuck in — at some point there will be too many holes to deal with — or some of the holes will enlarge because of the immense pressure to the point where even a fist will not block them…

And then the whole thing will just burst wide open and the pent up energy will roar through devastating everything in its path.

If you live in an ivory tower of a university, building models with lots of variables, it seems possible to miss a lot of obvious things, especially if what you are using as a base is previously published articles in your own field.

“As individuals we are good at learning causal associations for local-scale phenomena, as would have been the case in our Pleistocene conditions. But we are not really very good at recognizing more global-scale patterns over really long time scales. This is even true of time scales less than a single human life time. But it is severely lacking for scales in centuries or longer. We simply have no mechanisms for grasping spatio-temporal patterns of such immensity. And it is exactly at such scales that inertial phenomena cause us problems.

Though occasionally a rare individual is born with an ability to deal somewhat with these scales of time and space, and with the dynamics of massive system components, the rest of our kind usually treat them as crazies if they say anything to anyone! As a society, as an aggregate mind we are horrible at dealing with this. Even though we record phenomena in forms that extend over multiple generations it doesn’t seem to matter. Each generation seems intent on ignoring the lessons of history, of discovering its own truths such as they may be. As a species we do not learn causal associations at the scales of importance to our long-term success. As a species, we are an imbecile.”

I am afraid not. It becomes sort of obvious, when you get involved with the system. There was an article a while back about peer-reviewed papers very often not being reproducible. Also, about peer reviewers often missing obvious errors.

“The world is now filled with a large number of people in powerful positions who mistakenly think they know answers to questions, when they really do not.”

This is a key statement.

The egos of the powerful, the wealthy, the intellectual elites (see Krugman for example) — and the misguided belief of even the average person — that ‘we are the great race — we put a man on the moon — we can fix anything given the time, resources and necessity’

History is littered with instances when elites failed and were destroyed (see the failed empires and kingdoms of the world) — technology frequently fails — we cannot cure cancer, we cannot cure baldness, we cannot grow crops in snow — and often the ‘solutions’ we find are no solutions at all — take for instance our solution to feeding 7.2 billion people — that involves pouring oil and gas inputs onto the soil and plants — both finite resources — and we nourish these plants with water pulled from deep in the ground — water that once used up will be gone forever.

Mankind’s hubris will be our downfall — as you point out we have collapsed in the past — and picked up the pieces — but this time truly is different — we have 7.2 billion people on the planet as a DIRECT result of the ‘solutions’ that we have discovered over the last 200 or so years.

a large number of people in powerful positions who mistakenly think they know answers
Whereas these military experts do know the answer?:“The study says that by 2045:”
“world population could reach 10.4 billion,”
“Driverless transport is likely to be widespread.”

Hi Gail,
I think what you are describing is the law of diminishing returns colliding with fractional reserve banking. Can you explore fractional reserve banking in a future post. It is great while the economy is growing but a real bitch when it shrinks.
Keep up the great work.
Cheers
Bones

Gail, Lagarde’s references to numerology, as you put it, is not surprising given the origins of her success and placement within “The Order”. Satan, Ba’al, or the Lord of the Flies might not actually exist, but those to whom the likes of Lagarde and her peers must sell their souls to achieve their status do exist, and they demand sacrifices of many kinds.

The IMF and World Bank are neo-imperial, inter-governmental institutions that are instruments of the militarist-imperialist, Anglo-American rentier corporate-state owned by the top 0.01-0.1%. Many talk about the arrangement as a mysterious cabal or some such thing when the structure, corporate and state relationships, and results of the system of distribution of income, wealth, and power are everywhere to be seen, if only one takes the time to observe.

When the likes of Lagarde, The Chair, Bubble Ben Shalom, Greenscam, and Fed governors and bank presidents speak, they are speaking publicly the common language to one another, the elite opinion shapers and their benefactors among “The Tribe” and “The Order”, those vetted, well-placed individuals within the most powerful institutions.

The top 0.01-0.1% are so safe from examination, scrutiny, and challenge as to be untouchables, like demi-gods among mortals, whose power is so complete and their motives, values, and actions so utterly unexamined and unchallenged as to be like a superior extraterrestrial species having once upon a time invaded, having quietly taken over the affairs of humankind.

The way I took the numerology piece was as a tip-off to certain benefactors/privileged class to move their money before something bad happened to it. You are describing the issue that seemed likely to me.

Gail, I was so happy to see this “For example, a reduction in carbon dioxide emissions from closing coal plants risks major electrical outages is New England and seems likely to raise electricity prices. Such changes push the economy toward recession, and perhaps ultimately toward collapse.”

It seems so obvious to me, if you shut down the cheapest electrical generators, coal, the price of electric will go up. I am happy that the mercury and particulates will not be emitted but disappointed that the true cost is not even considered.

Just saw a book by a noted historian, The Great Degeneration: How Institutions Decay and Economies Die by Niall Ferguson (Oct 17, 2012), his take is all our problems are due to a decay of your institutions. If we fix them all will be fine. As you say silos.

In addition, the paper I referenced with respect to the electrical outages in New England points out the shortage of natural gas pipeline capacity in New England. This is a bottle neck that many wouldn’t think of–electric power generating plants can’t get natural gas fuel if whatever NG is available is going to homeowners who need it to heat their homes. If enough coal is taken offline, there may also be the question of whether we have the natural gas we need to make the transition.

Let me gently remind everybody here that 2008 was the end of a huge financial bubble, which was pricked by the onset of the global crude oil plateau a few years earlier.

Central banks had to create currency out of nothing in order to keep the economy (crude oil production and consumption) going, and they did just that, and we have remained on the plateau ever since, with the predictable result of more bubbles developing.

But nothing lasts forever and by all accounts we are due for a big leg down, if not in the next few years then almost certainly before 2020.

Be patient! Collapse is just starting folks, we are at the beginning of this story. We are right, they are wrong, it really is as simple as that, and this is going to be demonstrated within the lifetime of most of the people reading this.

Do I wish for it? Your darn right I do. Anything to wipe the grin off the faces of the techno-optimists and money changers.

“I am afraid I don’t wish for collapse, regardless of who is right or wrong. ”

i could not agree more gail. if we seriously look at how easy life is now and how dependent we are upon “what is” for our basic needs… collapse, even though it is inevitable, it is nothing to hope for.

It is very much something to hope for if we want to have any hope for our future generations. Yes, it will be tragic and billions of people may starve to death, but we will have reverted to a sustainable paradigm and the future of our race will have no more illusions of endless progress. Instead, they will be doing the things we should all have been doing to survive before the industrial and agricultural ‘revolutions’.

The wish for BAU is another example of a previous commenters quote concerning the human species inability to consider reality beyond their own short existence. It is this collective myopia that is driving us to the brink.

You make it sound as if we have a choice re the continuance of BAU. It will trundle on until it no longer can… As the parent of two small children I sincerely hope that it trundles on for some considerable time, as its ultimate failure will see suffering on an unprecedented scale and the final destruction of the biosphere as humans turn uber-locust in their desperate struggle for survival; the loss of global dimming from industry forces a further 1.2 degrees C rise in average global temperatures (Hansen); and 435 untended nuclear power stations spew out their radiation. I don’t think it is myopic to wish for a stay of execution.

435 nuclear power stations indeed, plus thousands of chemical plants which, as Alan Weisman states in his excellent book (The World Without Us p. 140) ‘could create a mini chemical nuclear winter.’. “They would also release chlorinated compounds like dioxins and furans from burning plastics. And you’d get lead, chromium, and mercury attached to the soot. Europe and North America, with the biggest concentrations of refineries and chemical plants, would be the most contaminated. But the clouds would disperse through the world. The next generation of plants and animals, the ones that didn’t die, might need to mutate in ways that could impact evolution.”
I hate BAU because of its massive hidden pollution running in my blood and in my 8 y.o. daughter’s blood right now (nobody cares), and I would love eating earthworms and leaves in cold and damp weather, but only if Mr. Hell was not waiting just round the corner. He actually is.

Yes, as the father of teen and pre-teens, I have to hope that the system is more resilient that we suspect. If BAU trundles on for a decade or so, I won’t complain, particularly if the biosphere is already trashed beyond the point of repair (for our kind).

BAU would be a perfectly nice outcome for an ever-narrowing spectrum of people who belong to the majority in a rapidly diminishing number of countries. Even there, BAU has only seemed perfectly nice over the course of its deterioration through the course of the past 50 years. Though things can certainly become more horrific elsewhere, I would venture to propose that BAU has not been perfectly nice for the great majorities in most of the world’s countries in the modern era, at whose expense the comforts of our BAU not insignificantly derive.

You are right. Quite a few of us have had the privilege of being well-educated folks in the US (or elsewhere). Some of us have had parents and grandparents who were fairly well educated as well. We have had more “stuff” and more family stability that a lot of people in the world could boast. The stuff we have today comes to us because many workers work at very low wages to make the goods we are buying.

When asked why he risked much of his fortune on building an electric car company after so many new car companies had failed, Elon Musk replied that if we continue to use petroleum for personal transportation, the price of oil would rise so high as to destroy the economy. Musk didn’t elaborate on his brief remark. His Bloomberg TV, ‘Risk Takers’ documentary is quite interesting.

Yes, Musk is no dummy, to be sure. I’m afraid, however, that he does not make the connection that the “renewables” infrastructure required for his $100,000 EV motoring requires a sufficient supply of liquid fossil fuels we can afford to burn to maintain the existing fossil fuel infrastructure at necessary scale to then support the ongoing build out of his “renewables” infrastructure to sufficient scale of NET EXERGETIC FLOWS PER CAPITA, so that we can ALSO grow real final sales per capita, which has not occurred since 2007-08.

There is a select minority of scientists and engineers who know this, but they have no standing among the oil industry principals and mass-media shills, nor within the techno-optimist Cornucopian milieu, no mass-social vehicle to communicate their critiques, concerns, and recommendations, AND have the expectation of keeping their jobs.

like so many others, Musk insists that we must have a future run on powered wheels.
If we have the ability to travel freely over vast distances from A to B, then by definition our prosperous infrastructure will survive into infinity.
Why should this be so?
Because the auto makers of the 20th c built factories and churned out vehicles by the million, and we all got rich as a result.–therefore it is obvious even to an economist that wheels=wealth.
Not quite.
Ford et al utilised the availability of seemingly unlimited cheap energy to build their cars, we aided him by buying cars and burning still more cheap energy. The auto market economy drove everything forwards on a debt driven economy.
For all his undoubted genius, Musk hasn’t spotted the flaw in his arithmetic. He is trying to build a (eventual) mass market car using expensive energy in an economy which has no more debt capacity…but we all buy cars and get rich, just like last time.
Musk is also following the same pattern for space flight. Recent history shows that the apollo programme and moon landings produced millions of jobs and prosperity for all concerned. Again, the entire thing was supported by cheap energy supporting its infrastructure, its basis was essentially a government handout.
The reason why NASA has had no more moon landings is a simple matter of EROEI, they brought nothing back but photographs and souvenirs—which come to think of it, sums up a typical vacation.
Nevertheless, just like wheels, spaceflight = wealth. It doesn’t, it burns energy.
It is perhaps interesting to consider that the Wright brothers and the Apollo program both used the power of exploding chemicals to overcome gravity. So much for ‘new technology’.

Once QE and ZIRP and all the other desperate actions stop keeping the ship afloat here is what Plan B is:

A) First you have to identify what the desperate actions are fighting against:

THE PERFECT STORM (see p. 59 onwards) http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

B) What will the elites do — and why?

When things unravel the elites will most certainly not stand by and allow complete chaos to overwhelm them — they will definitely be trying to influence the outcome —- they will most definitely want to cull the population drastically. That MUST happen because 7.2 billion people CANNOT be fed post oil. Here’s the plan:

1. Declare martial law ensuring that anyone who resorts to violence to obtain food is quickly smashed down (the NSA already knows who the potential trouble-makers are):
– you have seen the militarization of US police forces:

 I am more inclined to hold gold — because if the above is correct — it is highly likely that gold would remain a store of wealth in the new paradigm (but gold will be of no use initially — only if you survive the multi-billion person die-off)
 having a stockpile of food and water to survive at least 3 months will be crucial — the only way to join the ‘elites’ in the ‘brave new world’ would be to outlast the billions who will starve to death
 having productive land goes hand in glove with the above – and martial law might ensure that you are left alone to grow your food — while the ‘elites’ carry out an accelerated die off by not feeding anyone — and not allowing them to access food stores and farms through violence.

The study also warned of a possible shortfall in global oil output by 2015:

“A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions.”

Also in 2010, the Pentagon ran war games to explore the implications of “large scale economic breakdown” in the US impacting on food supplies and other essential services, as well as how to maintain “domestic order amid civil unrest.”

Paul, at the current rate of US extraction of “oil”, consumption, reserves, and exports, by no later than 2017-19 the US will have extracted 50% or more of proved reserves, setting the US on an inexorable depletion trajectory.

Moreover, that US shale extraction has contributed 100% of global net “oil” extraction since 2008, long before the US extracts 50% of reserves and passes the point of no return towards inexorable depletion, global “oil” extraction and resulting net exergetic flows per capita will have begun to decline with the predictable results for the economies with the most vulnerable supply linkages and lack of capacity for economic exchange with the global market for energy, food, and imported consumer goods.

One can thus argue that the events in Egypt, Libya, Tunisia, Sudan, Syria, Iraq, Kuwait, Thailand, Ukraine, and parts of Sub-Saharan Africa imply that we’re already witnessing the precursor conditions for the end of the oil-based economic model, the end of “globalization”, and the end of growth of high-tech, complex, high-entropy mass-consumer economy, “capitalism”, and Anglo-American (increasingly “J_w_sh”) empire.

we are witnessing exactly that.
conflict in those regions is driven by resource shortages–oil, food, water, in various permutations, and by petty warlords trying to grab what they can before what’s left runs out. Oil catapulted growth in their populations to unsustainable levels, now they are fighting in some kind of denial of it. Wait till Saudi kicks in on that–their population is 30x pre oil levels.
Right now, the new regime in Egypt has pulled the threadbare rug from under their poverty stricken people by removing fuel subsidies, thus increasing fuel prices by up to 75%. How long before Cairo burns?

But Leo, wouldn’t funding the transition to a nuclear-powered society be very expensive and just cause us to bump up against the same financial limits that Gail talks about? You can count me as one of those who is most certainly not champing at the bit to till the fields in pre-industrial fashion, although that scenario is marginally preferable to dying of starvation.

Nuclear energy does not solve the problem. The problem is cheap oil is done. And the world runs on oil – not electricity. The electrical grid cannot exist without oil. Industrial farming cannot exist without oil

For what it is worth, a few years ago I participated in a symposium at the US Naval War Academy in Rhode Island. The people in charge there wanted to put together “War Games” based on scenarios that might happen in the future. I was a person who came to represent oil depletion. There were other “experts” from other areas, such as climate change. I wouldn’t characterize the Navy as being very far along in its thinking at that time, but the Admiral in charge was definitely following “Peak Oil” type literature. I pointed out that one of the risks was reduced funding for the Navy.

Paul, I understand you come frome a country where this is completely impossible to be thought, but upon my own and some historical experiences I find there is no way at all the military would care not even a minimum for Rockefellers after TSHF, nor will they do it for Bushs and Clintons. Martial law means the ruling of Mars’s fellows, particularly if they know BAU will never return.

We had not engaged in 60 years of planned obsolescence in the past with economists ignoring Demand Side Depreciation. Raymond Goldsmith pointed out that economists ignored the depreciation of durable consumer goods in 1952. And then television advertising was just getting started.

So we have been to the Moon and economists are still technological morons.

First 63 comments to this post seem reasonable and have a range of opinions, refreshing compared to the almost 1K comments to the blog post “Why Standard Economic Models Don’t Work–Our Economy is a Network” which made me think we were all in an echo chamber like listeners to AM Talk Radio are.

We have two basic needs: (1) A wide range of oil products and (2) A non-intermittent supply of electricity.

Intermittent electricity gets us essentially nowhere with respect to need (1), and not very far at all with respect to need (2). These energy products need to be cheap to produce as well. Wind and solar PV are not cheap to produce, so get us pretty much nowhere on where we need to go. Offshore wind is particularly a problem.

The statement that Scotland will be entirely self-sufficient has been put together by someone who doesn’t understand what our problem is. Scotland will be broke, if it successfully pursues this course.

What most people, including the economistas running the CBs don;t seem to grasp is that Debt has to represent something to be valid. You can’t keep issuing more debt if the resources are not there to back it up, it simply becomes irredeemable debt.

Gail; Great report, as always. Your web site title says it all. We live in a FINITE world. We have been mining iron, copper, coal, oil, natural gas, rare metals, etc, heavily for the past 150 to 200 years. Eventually these substances will run out. Recycling is not the answer. The law of entropy makes that unworkable in the long run. We are even mining water in the Ogallala Aquifer, the San Joaquin Valley, and numerous other places. You can travel across the country in a commercial airline, look down over West Texas and the Oklahoma panhandle, and see big green circles in that arid landscape. Those are crops, grown with water that is being mined from the Ogallala Aquifer. The water will eventually run out. The green circles will disappear. There are limits for everything.
Growth can not continue forever, and the myth of progress is just that, a myth that is not a perpetual truth. There has been astounding technological progress in the world in the last 150 years. Driven by cheap abundant energy sources, as you have often pointed out. That progress has already started to slow down, will eventually cease, and then retreat. Yes we will go backward from where we are now. Enjoy your cell phones, Priuses, and flat screen tvs, now. They will eventually be gone. The geological limits of our planet Earth ensure that. Obviously, this means that any economic models trying to predict future economic activity that don’t truly consider things like peak oil, etc, are guaranteed to result in faulty conclusions. I am always astounded to hear the supposedly intelligent, knowledgeable, leaders in the world political and business community constantly talking about economic GROWTH as the solution to our economic woes. As though growth is somehow inevitable.
Your clear concise view of the problem of excessive world debt is well written, and to me, seems easy to understand. Gail, why can’t those big names in economics, government, and business, see what is clearly obvious to you? I wish congress would have you in for one of their sessions and allow you to address them for 15 minutes. What you could teach them in 15 minutes. Wow. Gail, you’re one of my heroes. You are one of the USA’s finest resources. I know all who regularly read your articles would agree with me. Thank you for your efforts and insight.

Jeremy Rifkin’s breakthrough work over 30 years ago told all “Entrophy: A new World View”.
Since that book was published all events have unfolded. Unfortunately, not much has been done or culd have been done to stop the “process” in any meaningful way.

Rifkin’s interesting book Entropy (1981) was a popularization of the work of the Vanderbilt economist Nicholas Georgescu-Roegen. It included an afterword by NGR. It was not always met kindly. http://www.eoht.info/page/Jeremy+Rifkin

If you have contacts, you could send them a link to my articles. I don’t know if it is helpful, but I also have PDF versions of quite a few of my posts available, found of the PDFs of posts page. I don’t have the latest post up there yet–hopefully it will be in a day or two. These posts are hosted on a non-WordPress site, so they are not blocked in China. This list also provides a handy list of the names of my recent posts.

Cassandras are rarely thanked. If you want to discover Gail’s fate after the collapse, just watch one of those old silent films in which a lady is tied to the railway tracks and squirms helplessly as a chugging steam locomotive bears down on her. :-(

Dear Gail
I have a somewhat different take on Lagarde. Although I don’t keep up with the news religiously, it is my impression that she has put in place two important plans. First, how to deal with failed banks through bail-ins. Second, how to deal with failed governments through similar mechanisms.

When a company or an individual experiences a financial crisis, the preservation of their real productive potential is to a considerable extent dependent on the smooth functioning of judicial bankruptcy proceedings. Many companies and individuals have gone through bankruptcy and come out as productive companies and individuals on the other side. Lagarde is at least giving banks and countries some chance to keep functioning.

The big question for me is whether investors will retain confidence in real investments (such as tracked oil wells, robotic plants to make smartphones, new rail lines, etc.) and the financial instruments which enable the investments…if they have been burned by bail-ins. I never thought that so many people would still be buying bonds which are yielding much less than the true rate of inflation. Yet the notion that one can save money and invest it in financial instruments and live comfortably in retirement is still very strong. The notion that one must remain productive well into old age and most likely be living with a child is still completely foreign to most baby-boomers and younger people in the US.

The notion that the government will not be able to run a welfare state, or maintain a massive military, is similarly a completely foreign idea.

I think Lagarde does recognize the risks of financial collapse, but I think she believes that an orderly trip through reorganization is all that is required. The notion that financial reorganization will not restore a risk taking, investment for the future oriented economy, and will not restore a welfare state/ military-industrial complex government is foreign to her thinking, I believe.

Your comment is helpful. Yes, the timing is such that Lagarde has put into play “bail-ins” on banks, at least in Cyprus. Of course, some managed to get their money out of the banks, when the banks were supposedly closed.

I can believe that she is looking toward something like a bail-in for countries. The catch, of course, is that this time is different, and reorganization won’t fix the problem. I perhaps should do more reading / listening to her views.

Gail
I believe the IMF now sees ‘bail ins’ as standard operating procedure for failing banks. Within the last two weeks, I read a diatribe in Zero Hedge about Lagarde’s ‘socialist’ plot to seize the assets of the citizens of a country to save the government of the country. Which amounts to a ‘bail in’ by the citizens. In practice, it would be a ‘bail in’ mostly paid for by the wealthier people in the country. Since it was these wealthy people who put the succession of governments in place which bankrupted the country, there is a certain logic behind letting them pay for the clean-up. What it amounts to is a partial Jubilee, where rich people are required to pay down claims on taxpayers.

Bail-ins to come, certainly. It was tried in Cyprus: no riots or societal breakdown resulted, so yes it’s on the table now. As a mechanism it has much to recommend it: It’s easily sold as ‘taxing the wealthy’, it’s quick and efficient, and it has zero electoral penalty attached – most people have next to nothing, and those who are not truly rich but have merely saved assiduously for their lifetimes are electorally insignificant. No-one ever votes on principals after all.

Dear Xabier
One should never discount too heavily the factors of stupidity or cupidity or the seeking of social status. On the other hand, one should not discount too heavily the notion that officials may be trying to do the right think, given the limitations of what is possible.

Bail-ins are ‘solutions’ which write financial assets down to their true value while preserving as much of the real economy as possible. Now I think it is true that write-downs in financial values have an effect on demand (lots of people suddenly feel poor, and deficit financing becomes much harder), they avoid the notion of destroying production capacity in a vain effort to pay financial promises. They avoid eating the seed corn.

It seems to me that Lagarde and the IMF are recognizing that. In the US, the Obama position is that the economy has been improving now since the recovery began in 2009. Lagarde calls this period a disaster, with the top 1 percent getting practically all the gains while the bottom 90 percent lost ground.

If a person gets in trouble, then it is not going to love the Sheriff. If a country gets in trouble, they are not going to love the IMF.

“In practice, it would be a ‘bail in’ mostly paid for by the wealthier people in the country”. Hopefully would be that way, but usually don’t. Really rich people’s main assests are material stuff (real estate, factories, ships, planes, wathever) or financial stuff, and money in the bank is rather operational, not a saving. People who has most of their wealth in banks are rather in the middle class I think.

Besides, bankers do their own game: I know of somebody who had a couple of million USD in the Citibank here in 2001 (which is rather a lot of money here) and the bank employees suggested her to move it to Uruguay’s Citi a month before the crack. This was better for the bank because otherwise part of the money would have been seized by the government and sent to Argentina’s creditors.

Don – I am not so sure the retail investor is very active — the markets would collapse without Fed infusions — as was disclosed recently 29 trillion dollars has been infused into the stock market alone…

Paul
Wasn’t the 29 trillion figure all central banks combined? And isn’t a lot of it central banks just looking for yield, like everyone else?

I certainly don’t deny central bank manipulation of markets. I think we have to look at central bank actions in the light of human beings who are trying to keep financial factors from bringing down the real economy…as happened in the Great Depression. They may be doing it brilliantly, or stupidly, or any point between those two poles, but I don’t see any reason to deny their basic goal. And if that is their goal, then, when push comes to shove, they will sacrifice paper assets to try to save real productive enterprises.

I know I saw the $29 trillion amount also, and in fact posted a link to it. But I am confused. Aren’t central banks mostly buying up bonds, to keep interest rates low? Where are they getting all of the money to invest in stocks?

Gail
Please remember you are getting this from a guy who grows tomatoes, not a banker.

The central banks have balance sheets. A lot of their assets are now in worthless or very low yielding assets. So, as I understand it:
1. The Fed has stopped even mentioning the notion that it might sell all the securitized mortgages it has bought. Suppose they found a buyer at 50 cents on the dollar. What does that do to their balance sheet?
2. The Fed may have bought a 1 percent Treasury bond. If interest rates double, the value of that bond is cut by 50 percent. If interest rates increase to 4 percent, the value of that bond is cut by 75 percent. Do they do ‘mark to market’ and show the loss on their balance sheet?

Now I suppose that, since they are allied with a very large army, they would just print up some money if they needed it. But as I understand it, the central banks perceive that they need to get as much income from their investments as they can. And so they put some of their capital into the stock markets, relying on capital gains. I don’t suppose they have to pay taxes on any gains.

Your posts are very informative (I would say I love them, although saying that about something with fearful consequences sounds odd). There is one element, however, that I don’t see addressed: The capacity for breakthroughs to change the foundations of any forecast. There are tens of thousands of academics in science, engineering and economics, plus thousands of companies all motivated to seek breakthroughs. Although most will fail to produce high-impact results, the sheer amount of brainpower being focused on energy, efficiency, agriculture and so on inevitably will result in some game-changers once in a while, even though there are likely diminishing returns.

Some potential ‘mega-breakthroughs’, such as economical and safe fusion power, could utterly change the energy situation and require a happy and complete rewrite of your posts. But we all realize that we can’t rely on these, and they may not occur for many decades or even a century or two. On the other hand, smaller and more likely breakthroughs continue to stretch the apparent doomsday farther into the future, buying us energy, time and stability while we wait for the bigger breakthroughs.

For example, there continue to be many small small breakthroughs in solar power that are increasing its efficiency and allowing solar energy equipment to be made with less-toxic ingredients and with less embodied energy. Solid state solar technology can be made in a rugged-enough manner to last for many, many decades with very little maintenance, hence resulting in better and better energy return on energy invested. Naysayers point to the intermittency problem, but there is also great potential for accumulated small breakthroughs in storage. It seems to me that there is at least a reasonable chance that solar energy, coupled with improved efficiency and whatever remains of other energy sources, could turn the tide in favour of sustainable civilization. Even if there are economic failures and revolutions caused by excess debt, climate change and a forced shift away from fossil fuels, there is at least a chance that we will still have sufficient stable solar power to reach a steady state in which our descendants can have a comfortable lifestyle.

It would be nice to see an analysis of the frequency of breakthroughs of differing types and impacts, along with the probability that accumulated breakthroughs could change the scary outlook you project.

As I said in my post, our two big needs are (1) A range of cheaply produced oil products and (2) A cheap source of stable grid electricity.

I don’t see anything you mention that would give us cheap oil products. Perhaps fission might (in a stretch) give cheap stable electricity. Solar and wind, no matter how much you fix them, don’t give cheap stable electricity. You need to add cheap batteries as well. When you get done, the process definitely isn’t cheap. All of this requires our current fossil fuel infrastructure for development.

It takes an unbelievably long time to get new technology into play. Typically there is a four stage process: (1) Figure out how to do the process in the laboratory. (2) Ramp it up into a demonstration size small plant (3) Make a full size plant that works and (4) Replicate the full size plant, gradually adding improvements that bring costs down (I may have missed a step or two.) This process takes years and years. One study with respect to oil said that it took an average of 17 years to get a new process widely adopted.

Gail,
Storing intermittent energy as chemical energy in batteries isn’t the only way to store it. storing it as potential mechanical energy by pumping water uphill works. So does storing it as heat energy in molten salt. Less reasonable but also being researched is storing it as kinetic mechanical energy in flywheels. There are lots of ways to skin a cat.

All of the ways of storing energy (1) require that we keep our entire fossil fuel system in place, and (2) are more expensive than creating electricity from coal using existing power plants (horrible option, I know, but that is what the price comparison is to).

to repeat myself ad nauseam—fusion power would primarily deliver electricity
when in fact what we actually consume to ensure our ongoing survival is ‘stuff’
Everything you can think of (our stuff) has within it a proportion of gas, oil or coal —your food, your home, your healthcare–your transport—everything.
electricity might—just might–substitute for a tiny proportion of the above, but not much. Broadly speaking, electricity is not fungible, despite the fairy stories about recombining our atmosphere back into liquid fuel. (wheels again you see!)
In any event, successful fusion power might be so far into the future that the infrastructure necessary to support it is likely to have have collapsed before we get there. We certainly cannot build fusion plants without hydrocarbon fuels, and the best estimate of that is 40 years at the very outside, and probably half that, given the wars being fought over it—- and we’re barely off the fusion drawing board yet. Big power plants can only function in stable environments.
And if we do get fusion power–its as well to remember that you can’t eat electricity

Perhaps 10% of the population ACTUALLY understands Peak Oil, but I’d be surprised if more than 1% understand net energy.

However, I suspect that 0.1% or fewer understand net exergetic flows per capita and the low price of crude oil that is required perpetually to sustain oil-based, complex, high-tech, high-entropy “civilization” as we know it.

Difficult for ordinary mortals to absorb all of that, we need a short summary.
I write tech manuals for a living—anything that needs more than 100 words (hopefully less) to explain gets blanked out by the reader. (trust me on that one)
but the key word there is ‘perpetually’ I think, that we can have it all—forever. At least I think that is what is being said. Or it might be the exact opposite of course.
The price of oil, at whatever level, must cover the cost, in energy terms, of its own extraction, with lots left over to give us our lifestyle (ie the last 100 years or so), and to go on drilling more wells.
That is ‘perpetuity’ in human terms.
Any energy production/delivery system must follow the same rules, unless somebody has repealed the laws of thermodynamics without letting me know

I am less of a fan of the “exergy” and “net energy” concepts than I might be, because the people who (sort of) understand these concepts then seem to jump to the idea, “Good, all I need to do is substitute one kind of energy for another. There seems to be lots of energy from the sun, and from waves, etc. So we have no problem.”

Yes, it is indeed “exergy” but very specific types are required for specific purposes. We can only change very slowly. And price is very important–something that even EROEI analyses do not quite get to. They miss indirect costs (desalination plants), wages, cost of borrowing money, etc. Also, only look at costs at the “wellhead,” when what we need is costs delivered to the consumer.

The universe is all energy, but all of its forms are occupied being their evolutionary selves. Nominally intelligent life – humanity seeks to command these other forms of energy for its own uses and has done so effectively, but not efficiently. The feedback loop is telling us that, but most people don’t understand the conversion problem. In proverbs it can be explained in under 100 words: Waste not, want not. Having so much, it seems that people feel they deserve this and much more, rather than understanding our luck, which is objectively a level of waste. A truly conservative politic would be ever mindful of the planetary fuel tank. We need an age of human unity and cooperation. The candidate paradigm offered is: “Think local planet, act regionally.” Working across the boundaries found everywhere – between organizational silos and political geographies, forming greater communities, can increase efficiency which is, I think, the new growth. Gail demonstrates the data is available to document the necessity for a change of mind and a change of heart. Thank you for this work.

I don’t really think that a change of mind and a change of heart will fix where we are now. Perhaps–but I am doubtful–it could keep things together a big longer. But the fundamental problem of needing oil products and electricity for almost everything is hard to get around. And the problem of needing lots of debt to keep oil prices high enough.

Your thinking is popular, but I don’t think it really fixes our problem. It is not that we have a footprint of, say, two earths, and we need to contract to one earth. It is that we are using resources that renew over terribly long periods of time, at rates 1000s or 100000s of times the rate they renew. This problem is not really fixable.

Perhaps the time for a change of heart would have been the 1850’s when the evils of industrialism and the damage it wrought to the ecosystem were clear to a few thinkers like Ruskin in England.

But what would the result have been? -mass starvation, revolutions, wars, insanity. Populations in the West were already so large that they needed mass exploitation of fossil fuels.

As we know, the 1850’s to 1914 saw what one might be called ‘peak excitement’ regarding the great gifts industrialism was going to bring mankind: just find the catalogues of the great Exhibitions of the 19th century and one can see what was thought.

I find very little to disagree with in Gail’s analysis, as far as it goes, though I do wonder at limiting the discussion to a) well-meaning governments (I infer, governments that mean to govern for the good of all of their citizens) that b) actually believe in the efficacy of the policies that they are applying to achieve their nominal aim. Although with Gail I would agree that these policies, models and theories elaborated in their silos will not prevent and may instead quick the pace of multi-systems collapse or decomplexification, I can’t help thinking that the will of governments to actually grasp the nettle and wrench events onto a new course (as opposed to a path of acceleration of untenable status quo patterns of empire, energy and environmental overshoot, for example) may have largely ended in the 70s, in a loss of nerve. We recycle the old theories and models because governments no longer have the nerve to brace globalized capitalism or an increasingly integrated deep state that ever more evidently expects collapse, and in some eschatologically inflected imaginary, aims at winning the end game of the Great Game by somehow ending up with the least catastrophic hand, the greatest collection of poisoned tulip bulbs, by “winning” the apocalypse.

Governments need centralization of power just as the New World government needs even more focus on the core in ever increasing false hierarchies . I really don’t understand why people cannot see the only solution being a synergy between tech/green philosophies .
Paul at 12:15 am pushed me too far.
He exhibits the classic ignorance that future generations will scorn as the avalanche of human suffering brought about by industrial farming the “petro chemical way” wreak havoc on the human genome.
Study nature to find solutions and systems that are meant to sustain us and not eugenically and economically enslave us .
Really enjoyed the interaction here , especially the comments.
Thankshttp://vimeo.com/90003852 Keynote speech Vandana Shiva

Every living system is a self-organised system, that’s what makes living systems living. And when anything is self-organised, it is based on cooperation. Any system that is externally organized must become competitive and that applies to external inputs in agriculture and external inputs in systems in society.

When we stop defining ourselves as who we are, what we want, what we love to do, and what gives us joy…

University degrees are churning out students with a BT (Biotechnology) degree, and IT and MBA degrees. Biology has been shrunk to biotechnology, knowledge has been shrunk to information technology and organising has been shrunk to business management. I don’t think the world needs only those three skills. It needs much more. It definitely needs skills on how to take care of this planet. A skill that is not provided by industrial agriculture. All that industrial agriculture has done is destroy nature’s gifts of soil, biodiversity, water, even the air, and the climate.

Very eloquent and true. And conversely, those traditional family farmers who do love and care for the land often live -here in Britain – in near penury, crushed by the big supermarket buyers and dealing with an indifferent and contemptuous bureaucracy, and a government who believe that food production is an industry with too many liabilities to be worth troubling themselves with (when disease strikes and compensation is due) and insignificant from an electoral point of view.

Well… the people demand cheap food … and like expensive oil the global economy cannot function on expensive food for all — governments cannot tolerate that because hunger brings the most desperate sorts of revolutions….

Industrial agriculture is the most heinous thing ever unleashed on the planet — if you could identify the moment when the first petrochemicals were mixed into the soil — you would pin point the beginning of the end of civilization (and quite possibly the one act that may result in the extinction of mankind).

Thinking about the problem keeping spent fuel ponds cool when there is chaos all around — I doubt we can — but then so what — how many years will those things radiate toxic atoms — a hundred thousand?

The earth will laugh at our feeble attempt to destroy it — a hundred thousand years is but a single blink of mother earth’s eye…

If you are referring to me (or is that a quote from Paul from the bible?) …. I abhor industrial farming — in fact I will shortly go out onto my small permaculture operation and dig up another section and apply compost to this prior to planting more sweet potatoes.

Sure – after billions starve to death because the chemical inputs are no longer available IF anyone is left — they will farm using organic methods – because they will have no choice.

As for enslaving us — well — I have offered our entire village free seeds and training — and not a single person showed up — apparently they like being enslaved — they prefer to sprinkle magic grow pellets on their land — because that is the easy way out.

“The world runs on oil though — 98% of all farming uses oil and gas based fertilizers and pesticides… soil is dead without them.”
How can comments like those come from the same head??
Doesn’t matter , all unimportant apart from genuine innovative education, the “Holy Grail” or the cup of kindness & knowledge that we, freely share without apartheid or bias .True spirituality would allow the discernment and wisdom necessary and the 9th reasons it’s different this time.
A destructive satanic design for maximum collateral damage is unfolding and only those who see the edges of the bogus facade offered to us as a civilized society can ken the magnitude of what is about to be played out.

That those entrusted should “play” openly with word games and occult riddles is damming.

I would be interested in your views on the following financial and spiritual expert, qualities not often found in the same body and soul especially one with the courage to voice them articulately and to reason with historical accuracy.

Riba, the modern economy and the degradation of the Ummah By Sheikh Imran Hosein

Sorry but I don’t do the religion thing — so you lose me with the Satan reference.

There is not Satan (except on Black Sabbath records…)

There is only man — and many is an organism — and like any organism man seeks to reproduce — the difference between man and other organisms is that we are more intelligent and we have used that intelligence to temporarily overcome the obstacles that would normally limit reproduction of the species…

You may refer to that as ‘evil’ — but it is no different than loading a barn in a desert with grain — locking the doors — and throwing in some male and female rats…. they will gorge — they will reproduce — then when the food runs out — all of them will die.

That pretty much sums it up. If praying or blaming the devil makes you feel better then why not… However it won’t change things — no entity is going to help you. And in any event, I am not clear why anyone who ‘has religion’ would be upset about what is happening — after all — if you are a true believer then I am told you get to go through the gates of heaven where the angels and fairies will welcome you with milk and honey (and virgins…)

As for this: “The world runs on oil though — 98% of all farming uses oil and gas based fertilizers and pesticides… soil is dead without them.”

When this unravels — keep in mind — you can’t eat religion. And prayer will not make the soil rise from the dead.

I am not sure how pertinant this is. We have more green beans than we can use right now. I have tried to give them away to several different ones(some of who are getting assistance and have yet to have any takers. I think laziness is more of a problem than some realize. I guess I will gather them for dried beans and seed.

A lot of people seem to be used to eating only processed food. They wouldn’t know what to do with a green bean, if it was given to them. Many of them eat very few vegetables, and don’t understand why this is a problem.

We started growing our food a little while ago, and I noticed myself how I (we) had to make the “jump” and trust the food in our own garden. Let alone in someone else’s garden.
Somehow people in the western world seem to have lost the faith that good food comes unpackaged, and unprocessed. If it does not come from a supermarket shelf, nicely wrapped, people will have a difficult time eating it.
(However once they make the “jump” there is often no going back. I know that we now profoundly distrust anything in a nice wrapping)

Packaging is a major selection criterion in my shopping. Given a choice between (for example) cookies in a paper bag, and cookies in a plastic bag with a form-fitting plastic insert, or heaven forbid, cookies on a styrofoam tray wrapped in polyvinylchloride film, I’ll buy the ones in the paper sack, thank you.

If I find myself drooling over something in the centre aisles, I’ll look at the packaging, and think to myself, “I guess I really don’t want it that bad!”

Likewise, if I get thirsty, and I somehow left my infinitely-reusable, trusty, stainless, vacuum mug at home, I convince myself that I’m just not thirsty enough to buy an aluminum can, plastic bottle, or even a paper (coated inside with polyurethane) cup.

It’s not just the magic pellets they won’t. I have been trying to give three 30 ft rows of green beans away free for the picking for a week and no takers yet even though some of those I asked are on assistance. i live in a rural area in the central US

Stefeun, I think that money is a concept, nothing more, nothing less.
Being a concept, it has only imaginary ties to the real world. We can push the concept wherever we want, but when the concept has ties to the real world this would require the real world to be pushed around as well. Unfortunately (or luckily!), the real world has little regard for our concepts. Thus the real world will do what comes “naturally”, never mind our concepts.
So when you tie a concept to the real world the real world will sooner or later tear the concept apart. Hence it is IMO impossible to tie currency to a real world phenomenon for a sustained period. We can only do so only temporary, and even then at peril to ourselves.

Fortunately it is not necessary to tie money to the real world: just let everybody decide what to use as money. The rest will follow “naturally”.

Another side effect of the money concept is that no two people will have exactly the same idea what constitutes money. A central authority that decides what money is will have to fight all these different ideas, and eventually will probably loose that fight. Simply because you cannot force imaginary concepts to become identical.

Rien,
I wasn’t able to find which of my comments you’re answering to.
Please have a look at the one I just made to Dermott Gilley http://ourfiniteworld.com/2014/07/07/debt-eight-reasons-this-time-is-different/comment-page-5/#comment-38045,
in which I say that we should forget about the money ; whatever the currency is, the exchanges are always distorted by power struggles and it results into global manipulation such as we’re witnessing today. Maybe I’m wrong, but I feel like there could be a different paradigm (which maybe would result in nothing better!) ; something like using the same “currency” as the rest of the Nature…

Hi Stefeun, my comment was indeed to that post.
I wanted to share my viewpoint on what money is and how every coupling of money to the real world is bound to fail in the end.
I have some more thoughts on your post and will try to append it to that post. But my inet connection is rather unreliable at the moment and it seems to garble up things…

Item of General Interest

January 28. Tim Dicks, a reader of Our Finite World, has now made audio transcriptions of a total of six of my recent posts. (My earlier note was about three of them being up.) They are available as You Tube videos, with the images, and also as podcast recordings without images.